Financial Evolution: Education, Adaptation, Achievement

I just came across yet another report (Marketwatch) demonstrating the abysmal state of US retail investor performance compared to basically doing nothing. We just can’t help ourselves. Based on this latest research of 20 years of data, here are a few depressing facts:

Over the past 20 years, while the S&P500 annualized return was 8.2%, the average retail investor returned 4.3%. That’s really pathetic.

Reason #1 – Market timing (article calls it emotion-based investing). Basically, people are unable to just leave well enough alone. Rather than having a strategy and sticking to it, they find the need to pretend as though they can predict the future and buy when stocks are low and sell when they’re high.

Reason #2 – Fees. Investors also believe actively managed mutual funds will outperform the indices, which they don’t tend to do. They chase high past returns which really have no correlation whatsoever to future returns. It’s just luck (read “Fooled by Randomness” if you don’t believe me).

Gold. I’ve said it before and I’ll say it again; aside from a small portion of a portfolio as a purported inflationary hedge, gold is pretty much useless. It generates no income stream, has very little industrial use compared to other precious metals and was really just the result of a bubble over the past decade. Yet retail investors went nuts buying into physical gold, ETFs, gold mutual funds, etc. When your mom starts asking if she should buy gold, that’s when it’s time to sell. Well, well, it’s down 27% on the year vs a gain of 13% on the year for the S&P500. All the “experts” are citing old dips saying gold will still rally to $4000/oz in the next few years, etc., but they just look sillier by the minute. Logically, if gold at a higher value down the road were such a sure thing, why wouldn’t it be moving up instead of down? That’s just plain foolish. It’s called dogma. The facts and logic don’t matter.

We saw the same with retail investors buying Apple and we’ll probably see a new wave of real estate euphoria as well now that home prices have finally shown a trickle up. Bitcoin is another ridiculous phenomena; people are dumping their life savings into what may turn out to be the most prolific internet hoax of all time (and what’s to prevent anyone from making the next Bitcoin, thus rendering the current system useless?).

It’s easy to look back and say “told ya so” for anyone. But what’s not so easy (as Americans demonstrate time and time again) is to have a strategy and stick to it. During the 2008-2009 financial crash, I didn’t adjust my 401(k)

After years of (artificially) depressed interest rates on everything from US Treasuries to savings vehicles like money markets and CDs to borrowing rates for consumers, we finally saw a spike in interest rates in May. If rates keep rising at a similar rate in the coming months, there will be broad ripple effects in the economy and to most routine Americans. Here are the implications for a series of financial interests:

Mortgage/Refi Rates – We’re already seeing mortgage and refi rates spike upwards since they tend to track the yield on the 10-Year Treasury pretty closely. The 10-Year is now at about 2.1% from a low of below 1.5% earlier in 2012. That’s a significant move, so we may well have seen the best mortgage and refi rates of a lifetime. If you are in position to do so, I’d do it now! I usually think there’s more time, but at the moment, there are no tools left in the Fed’s arsenal, so the only thing to drive rates down again would be another severe recession, which might take a couple years to come to fruition again.

Other Borrowing Rates (Auto Loans, HELOC, etc.) – As with housing borrowing rates, we should expect to see all lending rates increase. Similarly, if you were planning on taking out an auto loan, you’ll probably get a better rate now than later. Also, if thinking about tapping equity in your home, now’s probably a good time. I already just locked in a 3% rate to tap some of our equity to do windows rather than using cash out of pocket, since this is effectively a 2.something % loan, which is below inflation. The way I look at it, I’m borrowing for free when considering inflation.

Savings Accounts, CDs, Money Markets – We may finally see savers rewarding with rising rates on safer investment vehicles. I think this will take months, if not 1-2 years to play out to the point where you’re finally getting a reasonable yield over inflation, but things should start moving in the right direction.

The Risk Trade Over? A primary reason equities have rallied (aside from strong earnings on cost-cutting), is that investors have been pushed into the risk trade with such low rates everywhere else. As we see this trend reverse, will funds flow back out of equities into safer instruments? It’s quite possible.

Dividend Stocks Out of Favor? A strong driver for owning dividend stocks of late has been the potential to earn a capital gain plus dividends paying more than any safer investment yields, bonds included. When CDs are paying 1% and you can earn 4% in a blue-chip stock, the case if pretty compelling. Well, once CD rates pop back to 3-4% for longer dated maturities, the case for owning dividend stocks becomes less compelling.

In general, the Fed’s intervention to depress interest rates here and around the globe have certainly been a positive for investors, the economy and Americans at large. But obviously when the Fed Funds rate is dropped to its absolute minimum, there is nowhere to go but up. So, ultimately, we must now face the reckoning which will be a headwind in all facets of the economy from borrowing costs, the flows out of equities to lack of consumer spending, decreased hiring, etc. We knew it would come eventually, it’s just been a question of how long. Given the current stock market euphoria, investors must be thinking that this will play out over a long enough period of time that it’s manageable. Hopefully that’s the case.

There’s a recent headline making the rounds of late showing that the rich keep getting richer while the rest either tread water or fall behind. Consider this recent report by Pew Research and I’ll share my thoughts below:

During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.

From 2009 to 2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.

This should not come as a surprise at all to anyone, nor should it be “shocking” or even create the anger and resentment that the typical MSM outlets use to foment class warfare. See, this is completely to be expected and it has nothing to do with “fairness”, the rich not being taxed enough or attempts to hike the minimum wage, etc. Here’s why:

Again, from Pew (I was going to say this before I even read beyond their headline, but they summed it up nicely):

These wide variances were driven by the fact that the stock and bond market rallied during the 2009 to 2011 period while the housing market remained flat.

Affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home.

Is This Fair?

Of course it is. You can debate whether you think the rich should be paying even higher taxes than they do and since half the country doesn’t even pay any federal income tax, it’s tough to argue that the middle class and poor are “over-taxed”. But that aside, regardless of the tax rate you levy upon well-off Americans, they’re still going to make the same investments – higher risk, higher returns. Note that this report conveniently chooses as its starting point 2009. That spring is when the stock market reached pivot bottom, so anybody invested in equities from early 2009 onward has seen their holdings virtually double in the years following. If minimum wage was an arbitrary $12 instead of what it is in your state, people at the lower end of the spectrum would broadly follow the same behaviors. People tend to live up to their income, spend what they make (often more, incurring debt) and don’t invest in these same assets that the affluent do anyway. Right, wrong or indifferent, the only way to get more Americans into the right gear is for them to earn more (which requires higher paying job creation, not the retail and service sector jobs this recovery is generating) and a change in behavior from consumption to investment.

Wealth Inequality Continues to Widen

This is a natural outcome of two broadly divergent situations: those with wealth who invest in positive-gain asset classes versus those with little to no investments where the only gains to net worth would come from real estate (which was stagnant at that time). So, of course, we’d expect to see the wealth disparity widen.

Don’t forget that these wealthy individuals are also taking on risk by investing in stocks, bonds, real estate, and other alternative investments. So, during a major stock market crash, you could tell a different story – the wealth gap shrinking, as again, middle and lower income Americans don’t see much change at all in their net worth while the affluent sample set sees their net worth decline dramatically.

So, in summary, these findings are not shocking or disappointing to me at all. I’m not even in that top 7%, but I saw my net worth go way up since 2009 for the same reasons cited in the study. I put away what I can in highly volatile, yet higher return asset classes since my time horizon is decades.

As long as I can remember, people have always complained about the accuracy of government-reported statistics and claims. For instance, every year, the government reports that the measure generally regarded as a barometer for inflation everyday Americans face, the CPI, is always much lower than people feel they’re experiencing in their everyday lives. Sure, while flatscreen TVs and crap toys continue to get cheaper each and every year, we’re paying record prices at the pump, for healthcare and other daily expenses. And these annual increases are WAY above the low single digit inflation reported in the CPI (here’s the source data from BLS). Anyway, while those complaints may seem to have merit, the bottom line is that at least the index is based on a pre-set mix of categories and the government can’t really do too much to manipulate them. And administration after administration has been criticized for using a crappy mix of indicators to consistently report a low inflation rate, so at least it’s not even a partisan issue. However, the jobs numbers have been grossly manipulated by Obama’s policies and it’s easy to see how, but supporters choose to ignore it. Here’s how he does it:

Definition: First, starting with how the mainstream media reports the “unemployment rate”, they tend to report only the U-3 measure which is the most favorable. It excludes discouraged workers who have stopped looking for work from the equation. So, when a long-term unemployed worker throws in the towel because there’s no hope, they no longer count in the equation. Let’s see how easy it is though to enact policies that entice people to behave in a manner that improves the reported U-3 rate.

Artificially Increasing the Numerator – Obamacare: Aside from the monstrosity that will ultimately bankrupt the country, let’s consider for a moment what impact Obamacare has on the unemployment rate. Because a provision requires that healthcare coverage or penalty kicks in for workers clocking over 30 hours per week, guess what employers do to get around it? They simply cut all their full-time 40 hour workers down to 30. Pretty crappy for the employees, but as a business owner, why not? After all, why would you voluntarily pay for your employees’ health care if there’s this easy solution out there – and if your competition is doing it? Heck, aside from corporations, even STATES are cutting worker hours to 29 per week to avoid the costs involved. What is the net impact? Well, if you have 100 workers at 40 hours per week, you need to hire a few more if they’re all working only 30, right? While you might lose some efficiency in training, sick days per worker, etc., roughly, you’d think companies have to hire about 25% more employees in the retail/lower-end sectors to maintain the same coverage. So, that’s what we’re seeing. Increased hiring in low-paying jobs, thus artificially increasing the number of people reporting income. So, that’s a fake improvement in the numerator brought about by Obama, now here’s how the denominator keeps being suppressed.

Artificially Decreasing the Denominator with Disability Fraud and Government Gimmes: There have never been more people (net number or as a percentage of any ratio you can think of) on disability. It’s simple, if you don’t want to work or can’t find work, but want to collect a check, just claim you’re disabled. In this economy, where the only jobs are crappy ones, you can appreciate why people are incentivized to do this. If you don’t believe me, just read about the facts – it’s a giant scam. There’s an example of a whole county in Alabama where 1 in 4 (yes, a full 25% of the population) receives disability checks. That is insane. And the states love it. They actually pay firms to find people they can shift off their own welfare rolls into the federal disability assistance system. It’s shocking, shameful, and it’s in full-swing. If people were already not counted, no change, but when people see everyone around them living off disability, they decide to throw in the towel and join up as well – after all, it pays about the same as a crappy minimum wage job anyway. So, by jumping onto the bandwagon, these people all drop out of the numerator of the equation, artificially improving the reported jobs number as well.

Has the administration done anything to try to combat this abuse? Of course not! Why would they? This sort of handout forces people to get out and vote – they can at least get out of the house to do that! And it would hurt the reported unemployment rate if, you know, able-bodied Americans actually counted in the equation.

Now, anyone can surmise just what the real unemployment rate would be if able-bodied people were actually looking for work (or working) instead of living off the government dime and whether companies would really be hiring more people if they didn’t have to chop 40-hr/wk workers down to 30 hours per week to avoid Obamacare penalties but the bottom line is, the reported rate would be WAY worse each month. So bad, that we’d look more like some struggling European countries rather than what you might derive from the rallying US stock market. People tend to equate strong equity performance with a strong economy and jobs market but nothing could be further from the truth. You can thank relentless job-cutting and Uncle Ben for investors throwing money at the risk trade since there’s nowhere else for capital to flow.

This past week, Yahoo’s CEO Marissa Mayer announced a ban on employees working from home. This, in a culture where many, many employees were used to doing this for years. Here are a few thoughts on this particular announcement, implications for businesses elsewhere and then I’ll share a few thoughts on my personal experience with working from home flexibility in my role:

Yahoo’s Announcement:

Going Backward? It seems kind of odd for a company that was once at the forefront of the web/tech movement to be moving in the opposite direction of US companies in general. Many companies are moving MORE toward remote work whereas this one-time beacon of lavish benefits and perks is now going back to 1990. However, consider that Facebook, Google and many other “competitors” don’t actually have widespread remote work. Yahoo’s leadership cites that they’re in a very collaborative space so it doesn’t work. At the end of the day, I can’t judge them. If they sense that they’re not getting as much collaboration and productivity out of their workforce, they have to do what they have to do.

Changing the Rules – This is surely going to piss off a lot of existing employees that were hired under a set of rules which was probably a key determinant in taking the job, compensation and possibly, over the years, passing on other opportunities. That leads me to my next point…

Saves on Severance -The moment I saw the headline, I’d tweeted that this will surely have a hidden benefit of saving on severance costs. I’m seeing this in my company. When you have more employees than you need, you either lay off or force them out by making them unhappy. We’ve seen all kinds of cuts to bonuses, annual raises, increasing workloads and other factors that are slowly forcing employees out the door to “greener pastures”. That’s saving millions each year in severance packages! Surely, Yahoo will experience the same “benefit”.

My Experience With Work from Home

The Hours are Blurred – I’ve written in the past about being a Project Manager, but essentially, it’s a very self-directed, matrix-reporting structure job where there’s really not much difference whether I’m in the office or in my home. The reason is, most of my team members are in Europe, Latin America and Asia-Pacific. So, I end up on the phone at home or on the phone at work. If all my team members were local, I could see going in each day, but since most of my work is over the phone, the only benefit I derive by going into work a few days a week is collaboration with my other peer project managers to see what they’re experiencing or the occasional meeting with a higher up. But the key issue that drives work from home also is the crazy hours due to time zone differences. I’ve had some calls at 6AM and sometimes have calls at 9PM or 10PM. Surely you would agree it would be unreasonable to expect people to be in their offices at those times, so I’d argue if it’s OK to do those calls from home, why not do a 9AM or 1PM call from home? It’s the same work. Additionally, since the hours are so blurred, there’s no real scrutiny or poor perception if you run to the gym over lunch or even run an errand during the day since you’re often working at night or before normal work hours. They know they’re getting well over 40 hours per week out of us, so the hours are a bit blurred. The expectation is you’re normally reachable and online during normal business hours but if you’re not occasionally, it’s understood that your off-hours work is making up for it.

Prove Yourself and Make it Work – Our group of Project Managers likes to work from home usually 1-2 days per week. Nobody does it everyday so as to not give the impression it’s being abused, but at the same time, we all make it work. If our output or results were lacking, it might cause our management to rethink their position. By continuously turning in strong results and meeting all requirements (being online most of the day, executing projects well, etc.), this perk continues.

HUGE Retention Benefit – I’ve been in the same role for 4 years now. I’ve usually jumped around to new roles every 2-3 years but I have to admit I’ll hate losing this perk since most other jobs at my company don’t have the same capability. I’ve been looking this year, but at this point, I’m only leaving for a promotion, not a lateral. I enjoy the work, and being able to work from home once per week lets me get to my kids’ school events, save a few bucks on gas/dry cleaning, get a jog in over lunch and any number of other benefits that I wouldn’t enjoy otherwise.

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